Legal Definitions - education individual retirement account

An Education Individual Retirement Account (IRA) is a type of savings or brokerage account that allows a person to contribute a certain amount of earned income each year. The contributions, along with any interest earned, are not taxed until the money is withdrawn after the account holder reaches 59 1/2 years old. If the money is withdrawn before then, a 10% penalty is applied.

One type of IRA is the Roth IRA, which is named after Senator William Roth. Contributions to a Roth IRA are not tax-deductible, but no further taxes are assessed on the contributions or accrued interest when the money is withdrawn, as long as all applicable rules are followed.

Another type of IRA is the Keogh Plan, which is designed for self-employed individuals or small business owners.

An Education IRA is a specific type of IRA that allows tax-free withdrawals if the funds are used for education costs. Before 2002, the annual contribution limit was $500, but it increased to $2,000 per year for families with incomes under $190,000.

For example, if a person contributes $1,000 to an Education IRA and earns $100 in interest, they will not pay taxes on that $1,100 until they withdraw it after reaching 59 1/2 years old. If they withdraw the money before then, they will have to pay a 10% penalty. However, if they use the money for education costs, they can withdraw it tax-free.